First Citizens BancShares, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2018. The unaudited consolidated results cover First Citizens BancShares and its wholly owned banking subsidiary, First-Citizens Bank & Trust Company. The company operates commercial and retail banking, deposit, lending, treasury, cardholder and merchant services, wealth management, mortgage and related activities.
Financial performance and condition
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Net interest income | $307.4 million | $273.2 million | $888.0 million | $785.1 million |
| Provision for loan losses | $0.8 million | $7.9 million | $16.9 million | $28.5 million |
| Noninterest income | $94.5 million | $96.1 million | $318.1 million | $413.4 million |
| Noninterest expense | $267.5 million | $257.6 million | $801.6 million | $749.4 million |
| Net income | $117.3 million | $67.1 million | $310.8 million | $269.3 million |
| Diluted earnings per share as reported | $9.80 | $5.58 | $25.91 | $22.43 |
| Taxable-equivalent net interest margin | 3.73% | 3.35% | 3.65% | 3.29% |
Third-quarter annualized return on average assets was 1.33% and return on average equity was 13.41%. The nine-month figures were 1.20% and 12.22%, respectively.
- Assets: $34.95 billion at September 30, 2018, compared with $34.53 billion at December 31, 2017.
- Loans and leases: $24.89 billion, up $1.29 billion, or 5.5%, from year-end 2017; non-PCI loans grew to $24.25 billion while PCI loans declined to $638.0 million.
- Deposits: $30.16 billion, up $897.3 million, or 3.1%, from December 31, 2017. Noninterest-bearing deposits were $12.21 billion.
- Allowance and credit quality: Allowance for loan and lease losses was $219.2 million, or 0.88% of total loans, versus 0.94% at year-end 2017 and 1.00% at September 30, 2017. Nonperforming assets were $130.6 million, or 0.52% of loans, leases and other real estate owned.
- Debt: Short-term borrowings were $687.7 million and long-term obligations were $297.5 million. Long-term obligations declined $572.8 million from year-end, principally following the extinguishment of $745.0 million of FHLB debt.
- Liquidity: Cash and due from banks totaled $262.5 million. Unencumbered securities and excess Federal Reserve cash totaled approximately $3.87 billion. The company had $6.08 billion of additional FHLB borrowing capacity, $2.20 billion of additional Federal Reserve borrowing capacity supported by collateral, and $690.0 million of available Federal Funds lines.
- Capital: BancShares reported a 13.23% Tier 1 risk-based capital ratio, 13.23% common equity Tier 1 ratio, 14.57% total risk-based capital ratio and 10.11% leverage ratio, remaining above well-capitalized requirements.
- Cash flow: Nine-month operating cash flow was $635.6 million; investing activities used $196.3 million and financing activities used $512.9 million. Cash and due from banks declined $73.6 million during the period.
Material changes versus comparable periods
- Third-quarter net income increased $50.3 million, or 75.0%, year over year; nine-month net income increased $41.5 million, or 15.4%.
- Net interest income increased 12.5% in the third quarter and 13.1% for the first nine months, driven by loan growth, higher loan and investment yields and lower borrowing costs.
- Noninterest income declined 1.6% in the third quarter. Nine-month noninterest income declined 23.0%, largely because 2017 included $134.7 million of acquisition gains; excluding acquisition gains and the 2018 debt-extinguishment gain, management reported a 4.7% increase.
- Noninterest expense increased 3.8% in the third quarter and 7.0% year to date, primarily from higher personnel costs, headcount, benefits, processing fees and occupancy costs related in part to acquisitions.
- The effective tax rate fell to 12.1% in the third quarter from 35.3% and to 19.8% for nine months from 36.0%, reflecting the Tax Cuts and Jobs Act. A $15.7 million tax benefit was recorded in the third quarter from updated information regarding accelerated 2017 deductions; the final impact was not yet complete.
- Accumulated other comprehensive loss increased to $247.6 million from $122.3 million at year-end, largely due to securities losses and the transfer of mortgage-backed securities to held-to-maturity classification.
Guidance, outlook, risks and unusual items
- Management did not provide formal earnings guidance. Its stated strategy emphasizes core deposits, loan growth, noninterest-income expansion, expense control, branch optimization and technology investment.
- On May 1, 2018, the company completed the $112.7 million HomeBancorp acquisition, recording $57.6 million of goodwill. The transaction added approximately $530.0 million of deposits at September 30.
- After quarter-end, the company completed the $28.1 million Capital Commerce acquisition on October 2 and the $30.4 million Palmetto Heritage acquisition on November 1, expanding into Milwaukee and coastal South Carolina.
- The company transferred mortgage-backed securities with an amortized cost of $2.49 billion from available-for-sale to held-to-maturity. The related $109.5 million unrealized loss remains in accumulated other comprehensive loss and will be accreted over the securities’ expected lives.
- FDIC shared-loss protection remained on $58.9 million of single-family residential loans. The estimated FDIC clawback liability was $104.6 million, with payments expected in March 2020 and March 2021.
- Off-balance-sheet exposures included $9.80 billion of unused credit commitments, $87.9 million of standby letters of credit and $74.8 million of unfunded affordable-housing commitments.
- Management stated that pending litigation is not expected to materially affect the financial statements, although ultimate liabilities cannot be determined. The company was assessing the effects of Hurricanes Florence and Michael on customers and markets.
- Interest-rate sensitivity analysis estimated that a parallel 300-basis-point increase would reduce 24-month net interest income by 0.14% and economic value of equity by 6.41%, based on September 30, 2018 assumptions.
- The board authorized repurchases of up to 800,000 Class A shares from November 1, 2018 through October 31, 2019. The company repurchased 125,000 shares for $58.1 million during the quarter and another 75,000 shares for $32.9 million through October 31.
Investor verification points
- Verify the sustainability of margin expansion as interest rates rise and deposit pricing becomes more competitive.
- Assess organic loan growth, commercial real estate concentration, credit migration, charge-offs and the adequacy of the allowance methodology.
- Separate recurring earnings from the $26.5 million debt-extinguishment gain, $15.7 million tax benefit, marketable-equity gains and acquisition-related effects.
- Review the valuation and duration risk of mortgage-backed securities, including the $75.9 million after-tax unrealized loss associated with securities transferred to held-to-maturity.
- Monitor integration, goodwill and purchase-accounting adjustments from HomeBancorp, Capital Commerce and Palmetto Heritage.
- Evaluate liquidity and capital after acquisitions, share repurchases, loan growth and potential FDIC clawback payments.
- Follow the ultimate tax impact of the Tax Act adjustments and the future adoption effects of expected-credit-loss and lease accounting standards.